If you are facing same issue then you might came to right place. After applying several method including password change, server name and connection method i finally got right fix for the issue.
Yahoo has changed server name. It seems Digsby people not maintaining updates regularly. Digsby default Yahoo server no longer working. My problem was solved by just changing Yahoo server. To fix the issue simple replace default Yahoo server with new Yahoo server.
Default Digsby Yahoo IM Server: scs.msg.yahoo.com
New Yahoo IM Server: cs213p3.msg.ac4.yahoo.com
Hope this help!